SAFTU calls on Treasury and the Reserve Bank to Stop coddling economic criminals and finally put a halt to illicit financial flows
28 August 2020
The South African Federation of Trade Unions (SAFTU) periodically demands the Treasury and Reserve Bank change macro-economic policies, to take into account the extreme suffering of poor and working-class people, as well as the need to fight the collapse in GDP with a genuine fiscal and monetary stimulus, not the fakery – and indeed outright austerity – we have been experiencing. And if asked, where will the money come from for genuine fiscal and monetary stimulus, we have provided answers, one of which reflects a micro-economic duty of the Treasury and Reserve Bank: to halt, to tax and to prosecute what are now Illicit Financial Flows (IFFs) by corporations and rich people, in the region of R170-425 billion annually, according to an obscure Treasury unit, the Financial Intelligence Centre.
For years, SAFTU and member unions have expressed disgust at not only the long history of multinational corporate looting of this country, starting with the Dutch East India Company’s settler colonial occupation in 1652, continuing through Cecil Rhodes, and then over the last century exemplified by the largest firm in Africa’s history, Anglo American with its ties to De Beers through the Oppenheimer family, especially when escaping with vast historic loot by delisting its primary financial headquarters from the Johannesburg Stock Exchange to London.
Throughout, both Western and subsequently also BRICS firms that have exploited our workers and environment in mining, banking, commerce, IT, services and manufacturing felt at home, given how unpatriotic and criminal the local elites were, first making massive profits during the crime against humanity of apartheid, and after apartheid getting their way with the new government. Those massive profits typically escaped our shores, because authorities tasked with implementing exchange controls turned their head away.
This thievery is truly world class. In February, PricewaterhouseCoopers (PwC) recorded South African corporations as party to more economic crime than anywhere in the world aside from India, and tying with China. During the 2010s, South Africa’s bourgeoisie was rated by PwC as having the most white-collar tsotsis in the world, closely followed by the French and Kenyan elites. Perhaps it is an improvement to see South Africa as no longer the world’s most corrupt capitalists, but now ranked in a tie for second most.
According to Trevor White, PwC Forensic Partner and Global Economic Crime and Fraud Survey Leader for South Africa, “Given the spate of recent scandals in South Africa, both in the public and private sectors, it is no surprise that organisations consider bribery and corruption to be the most serious economic crime to affect businesses. This, combined with increased involvement of senior management in perpetrating such acts, has resulted in a sharp increase in the value of losses incurred as a result… The level of involvement of senior management as the main perpetrator escalated from 20% in 2018 to 34% in 2020.”
Two months ago, a team at the University of Massachusetts – Economics Department chair Léonce Ndikumana and South Africans Karmen Naidoo and Adam Aboobaker of the Political Economy Research Institute – released an extraordinary study of more than 30 000 words. In more detail than any previous study, it documents massive financial theft associated with just one form of IFFs, net trade invoicing, which is generally defined as the misrepresentation of the value of imports or exports in order to evade customs duties and VAT taxes, to launder the proceeds of criminal activity or to hide offshore the proceeds of legitimate trade transactions, among other motivations. According to U.Mass researchers, in South Africa,
Net trade misinvoicing amounted to $146 billion (R2.5 trillion) over the 1998-2017 period alone. Export underinvoicing appears to be especially rampant in the case of mineral resources such as gold, silver, platinum and diamonds. While capital flight is not a new phenomenon in South Africa, it has accelerated substantially over the past decades, a period marked by aggressive liberalization of the national economy and rapid integration into the global economy. Capital flight is a concern in a country such as South Africa that faces deep financing gaps, high multidimensional poverty, inequality and unemployment. An important challenge faced by South Africa in its quest to tackle capital flight and the associated problems such as tax evasion, base profit shifting, and money laundering is the threat of erosion of the public confidence in state institutions in light of the emerging phenomenon of state capture orchestrated by an intricate network of private ‘enablers’ with deep connections within the state and in the global economy. The adverse effects of capital flight on economic development, state institutions and governance call for urgent attention to prevent even more devastating consequences for the country’s political and social instability.
We endorse this study and we insist our media finally pick up this issue and give it due coverage so the society understands why Sandton and Stellenbosch corporate rulers need to be fitted out in orange overalls just as much as do the bandits working in Pretoria, the provincial capitals and so many municipalities. We have been outraged at recent reports of several billion rand worth of illicit state tender malfeasance, especially during the Covid-19 pandemic. But we would encourage outrage and we demand accountability for the vastly larger sums of private-sector corruption.
We blame, in part, the loosening of exchange controls – especially the Financial Rand’s 1995 abolition, and permission given to JSE firms to relist offshore – which created more incentives for offshoring capital, through both Illicit and Licit financial flows. These flows could readily be reversed if capital controls and trade regulations were applied properly, and if the SA Police Service took economic crime seriously.
There are many examples of respectable corporations engaged in IFFS:
De Beers’ mispricing of diamond imports and exports from 2004-12 alone was valued at $2.825 billion (R48 billion), according to researchers at the Universities of Manchester and KwaZulu-Natal in a 2014 study (http://thestudyofvalue.org/2014/05/15/new-lcsv-working-paper-explores/).
During the 2014 platinum strike, the Alternative Information and Development Centre in Cape Town reported that disputes between workers and three firms – Amplats, Implats and Lonmin (now Sibanye-Stillwater) over manipulated corporate profits worth R15 billion over ten years had major implications for wage demands (http://octfi.org/wp-content/uploads/2014/06/Press_conference-Statement.pdf).
Occasionally the scope of the problem is revealed to the public, such as in October 2019 when the Financial Intelligence Centre within Treasury conceded that each year, $10-25 billion (R170-425 billion), or 3-7% of South Africa’s annual GDP, was removed illicitly (https://www.dailymaverick.co.za/article/2019-10-27-sas-anti-money-laundering-measures-under-global-spotlight/).
That Centre’s director, Pieter Alberts, has shown that from 2002-17, there were 1.5 million separate Suspicious Transaction Reports (STRs) within the banking system, thanks to a massive increase during the Zuma era. The categories of these STRs are corruption, cyber/electronic fraud, serious economic offences, serious fraud and illicit tobacco. By volume, Alberts has acknowledged, while ‘proceeds of corruption’ account for 5% and proceeds from criminal activites (e.g. drug and tobacco smuggling) are 35% of the flows, the vast majority – 60% – are due to commercial tax evasion.
As a “very conservative” estimate of the costs to the fiscus of such activity, Judge Dennis Davis estimated R50 billion annually (https://www.businesslive.co.za/bd/national/2019-12-27-tax-fraud-and-evasion-cost-r50bn-a-year-says-dennis-davis/ Fiscal drain of at least R50 bn/year).
One South African watchdog, financial analyst Redge Nkosi, describes how South Africa’s biggest banks set up a currency rigging scheme to profit at the expense of the economy:
Because banks have knowledge of their clients’ expected deals for the day or even for the next weeks and months, they use that knowledge to rig the market (make a profit) and give their clients a bad deal. Banks may even share sensitive client information with each other, which is illegal. Even if they don’t share this information, each bank on its own can use the information of its own clients to manipulate the market or make a profit illegally. Sharing client information is illegal but so is gaining from the fact that the bank is using the clients’ monies to profit itself. (https://www.thejournalist.org.za/spotlight/currency-manipulation-collusion-and-other-corrupt-practices)
Even though the Competition Commission has been investigating this particular form of IFFs, we have diminishing confidence in Treasury and the Reserve Bank when it comes to halting bank scamming of our society and economy. Last year, when confronted with new evidence that in the United States, the international banks rigging the South African rand are being prosecuted and are paying very substantial fines, the Finance Minister turned his head away:
Mboweni said the currency market is a deep and liquid market, and it is difficult to determine any material or long-lasting impact of any one transaction on the level or value of the currency. “It is important for members to differentiate between the impact of any transaction on consumers and the impact on the value of the rand – the investigation before the Competition Commission appears to be related more to the conduct of bank traders towards clients, rather than providing evidence of their affecting the actual value of the rand.” (https://www.businesslive.co.za/bd/national/2019-08-11-no-evidence-of-currency-manipulation-says-tito-mboweni/)
The flippancy with which the Treasury deals with citizens suffering such systematic theft – as bank ‘clients’ – is also reflected in its infuriating attitude to our members’ genuine socio-economic concerns, for example, in denying more income support and food subsidies even though South African hunger rates and unemployment both are reaching 50%, and poverty (living on less than R50/day) is now affecting at least two thirds of our society.
With three million or more workers in the private sector newly unemployed, the austerity Treasury is applying mindlessly to the state is literally killing our constituents, such as millions of daily passengers in kombi taxis forced to cram in at 100% occupancy because Treasury could not find R3 billion for working-class transport subsidisation to reduce this to 70% – although our country’s elites are given subsidies costing at least ten times more this year, for their trips on SAA, Mango and the Gautrain.
We are now also condemning Treasury and the Reserve Bank for collusion in one of the most unpatriotic acts that elites have engaged in these last decades: Illicit Financial Flows.
If the Finance Minister and Reserve Bank Governor are unable to halt the IFFs, then they need to admit that they have shortchanged themselves on resources and must be given urgent legislative and regulatory powers to police the corrupt financial markets.
If they are unwilling to do so, they need to be replaced immediately, by patriots.
Issued by SAFTU, 28 August 2020